Some ASX dividend shares have very big dividend yields, making them cash flow kings for investors looking for passive income. I'm going to talk about how we can generate $2,000 of dividend income from an investment of $20,000 with high-yield ASX shares.
When a business pays a relatively high amount of its profit out as a dividend to investors, and it trades on a low price/earnings (P/E) ratio, then the dividend yield can end up being enormous.
I don't think people should buy a business just because of the dividend yield – the earnings (growth) and valuation need to make sense for the long term.
Having said that, a business that seems significantly undervalued can reward shareholders with such a big dividend yield that the share price doesn't need to rise for that company to pay an attractive passive income.
Shaver Shop Group Ltd (ASX: SSG)
This is one of my preferred ideas when it comes to high-yield ASX dividend share investing.
The company has grown its dividend each year since 2017. It said in its recent FY23 half-year result that it has an "intention to continue to increase the dividend provided it delivers the best returns for shareholders".
It has been one of the few ASX retail shares that have increased its dividend every year over the past five years.
The retailer sells hair removal, oral care and other beauty-related products. I think demand will continue for its products during this uncertain period – our hair does keep growing after all. The company can cushion any same-store sales decline by continuing to expand its store network in Australia and New Zealand, which would help total sales.
According to Commsec, the company could pay a grossed-up dividend yield of 15.3% in FY24.
Metcash Ltd (ASX: MTS)
Metcash is the business that supplies a number of independent retailers such as IGA supermarkets, as well as liquor stores like Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
It also has the hardware brands Mitre 10, Home Timber & Hardware and Total Tools.
This combined group of businesses could continue to perform even if the economy goes through a wobble.
The high-yield ASX share has committed to a dividend payout ratio of 70% of its underlying net profit after tax (NPAT). It's valued at under 13 times FY24's estimated earnings according to Commsec. The FY23 grossed-up dividend yield was 8.6%.
Despite the uncertainty of the economic situation, the business continues to report sales growth, which could help further dividend strength in FY24. In the first seven weeks of FY24, group sales were up 2.3%.
Rural Funds Group (ASX: RFF)
This is a real estate investment trust (REIT) that owns a variety of farmland including almonds, macadamias, cattle and vineyards.
The Rural Funds share price has dropped around 20% this year, which has had the effect of boosting the yield on offer from the high-yield ASX dividend share.
High-quality tenants are paying appealing, and growing, rental income to Rural Funds which is then paying attractive quarterly distributions to investors.
The business' FY23 gross distribution to investors is 12.2 cents per unit, which translates into a distribution yield of 6.5%.
Rural Funds said in a recent newsletter that its rental revenue is growing faster than interest costs and cash profit is expected to increase again in FY24.
Foolish takeaway
Investing $20,000 evenly across these three high-yield ASX dividend shares would lead to a possible average grossed-up dividend yield of just over 10%, which would mean a grossed-up dividend income of more than $2,000.
